The Shale Oil Revolution Actually Reflects a Nation in Decline

Here in the opening month of 2019, as the US consumes itself with hot debate over a border wall, far more important topics are being ignored completely.

Take US energy policy. In the US press and political circles, there’s nothing but crickets sounding when it comes to serious analysis or any sort of sustainable long-term plan.

Once you understand the role of energy in everything, you can begin to appreciate why there's simply nothing more important to get right.

Energy is at the root of everything. If you have sufficient energy, anything is possible. But without it, everything grinds to a halt.

For several decades now the US has been getting its energy policy very badly wrong. It's so short-sighted, and rely so heavily on techno-optimism, that it barely deserves to be called a 'policy' at all.

Which is why we predict that in the not-too-distant future, this failure to plan will attack like a hungry wolfpack to bite down hard on the US economy’s hamstrings and drag it to the ground.

Shale Oil Snafu

America's energy policy blunders are nowhere more obvious than in the shale oil space, where it's finally dawning on folks that these wells are going to produce a lot less than advertised.

Vindicating our own reports -- which drew from the excellent work of Art Berman, David Hughes and Enno Peters’ excellent website -- the WSJ finally ran the numbers and discovered that shale wells are not producing nearly as much oil as the operators had claimed they were going to produce:

Fracking’s Secret Problem—Oil Wells Aren’t Producing as Much as Forecast

Jan 2, 2019

Thousands of shale wells drilled in the last five years are pumping less oil and gas than their owners forecast to investors, raising questions about the strength and profitability of the fracking boom that turned the U.S. into an oil superpower.

The main conclusion of this analysis is that US shale producers have overstated their well output by 10% collectively. And as much as 50% for certain individual companies.

These numbers are easy to collect and analyze. While it’s a great thing to finally have the WSJ show up here, many years later than the independent analysts cited above, they still didn't get close to the actual truth.

In actuality, the shale plays are going to produce roughly half of what is currently claimed by shale operators. Instead of a -10% collective hit to production, we should be ready for something closer to -50%.

Not only does that “raise questions” about the role of the U.S. as an oil superpower, it ought to raise alarm bells about its entire energy strategy.

A Quick Lesson On Strategy

To take a minor detour, I spent several years of my life as a corporate strategy consultant. These efforts involve teams of people, complex processes, and loads of work. But if you strip away all of the complex nonsense, a strategy is quite simple.

A strategy is nothing more than thoroughly addressing both parts of this question: Where are you going, and how are you going to get there?

Or put another way: What’s your vision and what are your resources?

This is true whether you're a major international corporation, a nation, or an individual. If you know where you're going and how you'll get there – congratulations! – you have a strategy.

Because it's easy to dream up more “vision”, the vital part of having a strategy is being sure that your vision is both grand but achievable given your resources.

The US has been blessed with abundant oil and natural gas resources. What it lacks is any sort of a vision about where we’d like to be when those wind down and eventually run out.

Will the US resemble a 3,000 mile wide version of Detroit, full of decay and misery? Or can it engineer an intelligently-planned and executed transition to a complex network of clean and sustainable energy sources, full of hope?

It’s really not an overstatement to say that the US is currently operating without an energy strategy. The vision, such as it is, seems to rest on the idea that sufficient oil will always be found and produced to meet its needs. End of story.

No, It Won’t

While I have a lot of admiration for the technology, the expertise and the diligence of the people working in the oil sector, I have even more respect for geology.

The US began its love affair with oil by going after the conventional reservoirs that sat atop ancient marine shale basins where 400 million years' worth of ancient sunlight was stored in the form of deposited plankton and algae.

Those conventional reservoirs eventually were all found and tapped. Everyone in the oil space agrees that the biggest of them have all been discovered and there are very few conventional finds left.

What the shale "revolution" (or "retirement party" as Art Berman more accurately calls it), did was to drill straight into the source rocks themselves. Which require much more energy and cost to coax oil from.

What’s left after the source rocks? Nothing, that’s what. There are no “pre-source” rocks to drill into next.

We’re scraping away at the literal bottom of the geologic barrel, pretending as if that were all perfectly normal and sustainable. It’s neither.

Or to continue to flare off (i.e. burn) excess natural gas from these wells that you can clearly see the wastage from space?

Additionally, fracking has led to shortages of fresh water and sand, as well as pipeline bottlenecks. All of which speak to the blind haste and urgency of the shale business.

As poor as the economics are for the shale drillers, which have collectively spent some $260 billion more than they have taken in from their operations, things are even worse than commonly understood. As the public is on the hook for billions of dollars worth of road and bridge damage caused by fracking trucks.

In Texas, the road damage might be as much as twice the amount brought in by taxing the oil operation revenues. So billions of public subsidies go typically uncounted in the overall costs of fracking for shale oil and gas.

In short, shale extraction efforts are being conducted at such a furious pace and with such an absence of strategic planning that even an illegal warehouse rave seems well-organized by comparison:

Meanwhile the US press continues to cheerlead the efforts to rip the oil and gas out of the ground as fast as possible. As if there were some national emergency where there just isn’t time to do things right.

What’s the emergency, we wonder? What’s so urgently important that we feel the need to cut corners and simply burn our natural gas, a non-reneweable fossil resource, as a waste product into the night sky?

The emergency, we suspect, is that those involved in financing the shale companies don't want people pausing long enough to ask the right questions, which the WSJ finally did.

Conclusion

Look, I consume oil and gas. I drive a car and I heat my house in the winter. So I'm not even remotely saying that the shale plays should be summarily abandoned.

What I am saying is that we’re blindly proceeding without any sort of national strategy in place, using up extremely valuable and non-renewable energy resources at a blistering pace.

Should our oil be taken out of the ground so quickly that exporting it to other nations is the only opportunity to ‘get rid of it?’

Maybe. Or maybe not.

First we’d have to know how much there is (i.e., the resources) and where we hope to be when it runs out (the vision). If there’s enough to fund both our future visions and export some, too, then OK, go ahead and export it.

The problem, as you know, is that the US has no clear vision for where it would like to be in 20 or 30 years.

If the future is going to be mostly electrified, then there are huge energy expenditures to be made in alternative electricity production and storage, build-out of electric vehicles and mass transit systems, and a complete overhaul of the agricultural system.

I would propose that the energy cost (not the dollar cost) of all that activity is largely unknown. Which means that the US is running the risk of wasting this last bonanza from the shale revolution on frivolous pursuits.

If the WSJ analysis is right (and they did not consult with any of the experts I trust on the matter) then there’s around 10% less oil in the shale plays than we thought. Not great, but survivable.

If the analyses I trust are more accurate, then there’s closer to only 50% of what we thought was there. This is a big problem for a nation without any sort of a plan, especially one that has used the shale output to convince itself that oil abundance is always going to be a part of the landscape.

Beyond the significance of not having an energy strategy, there’s the more immediate predicament of how a nation up to its armpits in debt, and sinking rapidly, is going to fare when the great output boom stops and then heads into reverse.

High levels of debt and rising energy costs are a terrible combination.

We’re placing that collision within the next three years. Are you prepared for that?

As things stand, the US will blunder into that new era completely unprepared, as one might expect for a nation in decline.

In Part 2: A Bust For The Ages, we dive much further into the path and scope of the coming shale yield shortfall, and detail just how devastating it will be for both government, industry and individuals alike given the massive dependency on current assumptions.

If future output disappoints even by a little, the cascade of ripple effects across the economy as that becomes understood will be extremely painful. But the math clearly shows volumes will disappoint by a lot -- so get ready for a bust for the ages.

Join the discussion

11 Comments

There may actually be a behind-the-scenes energy plan -- invade Iran and steal its oil like they did with Iraq. Not sure, any thoughts on this?

The problem with developing an energy policy is that it would have to squarely address the insane economic policy driving it all. A real energy strategy would have to account for the increases in energy demand needed to fuel future growth, and extrapolate the pitiful increases in alternative energy in relation to the growth in fossil fuel use. In short, a real energy plan would have to admit that what we face is unsolvable. That's probably why were aren't getting one!!

Here in Canada I just heard that the government plans to bring in another million immigrants next year (I believe our population is over 30 million but I stopped following it since I am so disgusted by it). And somehow the national economists running the show have actually convinced themselves that economic growth LESSENS environmental impact (I'm not kidding, they actually said this a couple years ago).

Economists are addicted to growth because it hides their incompetence in managing economies. They can bury their bubbles and mistakes and prevent real estate crashes by just bringing in enough new people to absorb it. I have heard that the Australian real estate market barely dropped during the 2008 crash due to the massive influx of immigrants maintaining demand.

I’m guessing that any strategy you considered had to include 5% corporate growth forever?

I first ran across that phenomenon in accounting classes, before my corporate career. I remember thinking that a company that grew at 5% forever, would eventually take over the entire world economy. Also, that it would inevitably face planetary constraints.

There may actually be a behind-the-scenes energy plan -- invade Iran and steal its oil like they did with Iraq. Not sure, any thoughts on this?

The narrative that the US received a significant amount of oil as a result of the invasion is a common misconception. First, a chart from the EIA showing the the destinations of Iraqi oil exports by destination in 2014. (Figure 14 in the link below)

The immediate question might still be, “ well 14% of Iraq’s oil exports is still a lot, surely that was still reason enough to invade”. While a reasonable question, it isn’t borne out by the export data in the years on either side of the 2003 invasion: (2nd figure in the article below)

This chart is also derived from EIA data from 1998 to 2007. As you can see, oil exports to the US from Iraq remained relatively steady on either side of the invasion, even dropping slightly after the invasion, although production obviously dropped due to the disruption of the war.

As a disclaimer, the Iraq war was a massive policy blunder, but the assertion that it was merely a resource grab isn’t substantiated by the data. If anything, China, the US’s biggest geopolitical rival, got more out of Iraq than we did. I’m not a dispassionate observer, I served as a platoon leader there in 2011, and have had a lot of time to research how we got into that mess in the first place. I am of the opinion that we never should have gone into Iraq, but I am always hesitant to blame malice or plotting whenever ignorance and poor planning are competing reasons.

People focus on the price of oil, when the cost is far more important at this point in time.

Gas may be hovering around $2, but the cost of producing oil has risen quite a bit the last 15 yrs, as it's getting more difficult--and expensive--to get. Low price + rising cost = shrinking profits.

Oil generated a ton of wealth in the 1960s - 90s when it was cheap to produce, but now it is close to being a drain on wealth. Especially factoring in water use and other external costs Chris mentioned. Given our addiction to oil (we would have great difficulty surviving without it), what will happen if the cost of oil exceeds our ability to pay for it? Logic and arithmatic would indicate it will bankrupt us. I'm afraid we are going to find out in the next decade.

Great summary, Chris. You have outlined the essentials and the preferred course of correction(enter William Jevons). Unfortunately, the economic trend of borrowing from the future to finance the present holds sway due to the financialization of the economy. The price of a free lunch is on its way up!

Thanks for the charts, yes I suspected so. I understand that the justification for the invasion was that Iraq was planning to dump the US dollar for oil trading and use its own gold based currency. Basically, the same as what happened to Libya recently. So although oil imports directly from Iraq didn't change much, this wasn't required because the US could continue getting its oil from all the previous countries via its trade deficit, which is entirely reliant on the dollar being the global reserve petro-currency. Iraq starting its own trading network using something else would have been very dangerous to the US.

As far as Iran goes, I wouldn't delude myself to believe that invading it would open the pipes straight back to the USA , but it would serve to bolster production in the dollar-centric world so that the dollar would continue to reign supreme which would enable the US to continue importing all the oil it needs from a variety of places. I believe Iran has already begun oil trade with China and Russia using a non-dollar currency which is a major threat to the US dollar. It seems that all the western sources of oil look to be peaking and nearing decline, whereas Iran may represent the last location that may (I think Iran's oil reserves are kept secret?) have opportunity for more oil. Hence all the sabrr rattling about Iran. China and Russia are too big to invade but a proxy war could develop in Iran.

I agree. Oil is mostly fungible. If the US got all the oil from Iraq, we wouldn't buy as much from our other sources. Those sources would then sell to others around the world. The total oil market would remain the same. Saddam wanted to sell his oil to Europe denominated in Euros instead of dollars. That was a stronger threat to the US hegemony because having the world's reserve currency gives the US an outsized advantage over others. We just have to print (at most) the currency. They have to earn it. Then, to keep their currency from getting too strong, they have to "invest" in US dollars.

Libya's Qaddafi tried to do a similar thing. He supported a gold (or gold based) African Dinar to unify the continent. That would be a huge hit to the fiat system. We HAD to make examples of them. Both those leaders were taken out. Look at the shambles we've left behind in both countries. Meanwhile, we're still paying for our military to police the insurgents in those countries. Who really wins?

I read somewhere in the last day or two that Saudi Arabia hs re-assessed its oil reserves and now has much more than ever. Much happiness in the report.

Don't know if the increase is really significant or if it's even true or if true if it will put off the evil day for long.

Well...I'm still not convinced about that as I have not seen any of the data or methods used.

Here's a pretty thoughtful comment I ran across on Oilprice.com in response to an article about those Saudi "reserves."

Mamdouh G Salamehon

January 09 2019

Ms Irina Slav published on the 30th of April 2018 a virtually identical article under the title: ”Audit Puts Aramco’s Oil Reserves at $270 billion Barrels”.

The new article comes with a slight variation in the title though the sentiment is exactly the same. This new article like the previous one contains untruths, bias and deliberate attempts at delusion and I will explain why.

First, the Audit can neither be independent nor unbiased since some of the companies that conducted the audit (DeGolyer, MacNaughton, and Baker Hughes’ Gaffney, Cline, and Associates) have or have had service contracts with Saudi Aramco, so it can’t truly be classified as an independent audit.

Second, the claimed audit smacks of a blatant attempt by Saudi Aramco abetted by foreign oil companies which are beneficiaries of Saudi Aramco's largess to resurrect the IPO of Saudi Aramco. This attempt is bound to fail miserably because the IPO is dead and buried. Saudi King Salman ordered its withdrawal because of risk of American litigation related to the 9/11 destruction of the World Trade Centre in New York and question marks about the true size of Saudi proven oil reserves.

Third, we need to know the method the companies used to calculate the reserves. To get a relatively accurate figure, they need to count the actual number of Saudi oil-producing wells and the production and recoverable reserves of each. I doubt the would have done that as it takes a very long time to track the production and reserves of each well.

Four, a simpler way of estimating Saudi proven reserves is to add Saudi production since the discovery of oil in 1938 till now (for which we have figures) and have it deducted from Saudi claimed proven reserves along with an annual depletion rate of Saudi aging fields averaging 5%-7% for the same period. When I did exactly that, my calculations came to around 70-74 billion barrels (bb) of remaining reserves. My figures are more or less in line with those of other experts.

Five, the fact that Saudi Arabia’s proven reserves remained virtually constant year after year despite sizeable annual production and a lack of major new discoveries since 1965 is due to the Saudis increasing the oil recovery factor (R/F) to offset the annual production. The Saudis have been declaring an R/F of 52% or even higher when the global average is 34%-35%.

In other words, the "analysis" was conducted by firms that do business with the Saudis and - surprise! - they came up with a very favorable number right as MBS is trying to resurrect the Aramco IPO.

So...without seeing the analysis, and knowing that there are conflcits of interest in a very conflicted field in an even more conflcited part of the world, I will be taking this new analysis with a huge grain of dune sand.